Phone subsidies: Are they just bad loans in disguise?

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Iliad’s Free Mobile has opened a new front in its war with France’s incumbent operators. It’s taking Vivendi’s SFR to court over the handset subsidies it charges, claiming they amount to usurious loans that consumers wind up paying back in the form of hidden fees in their contracts, according to Bloomberg.

Iliad founder Xavier Neil told France’s Capital magazine that those fees wind up amounting to interest rates of 300 to 400 percent in a one-to two-year contract. That may sound excessive, but if you take a closer look at huge gap in pricing between prepaid and postpaid carriers, it doesn’t seem too far off base.

Free Mobile, for instance, doesn’t offer a subsidy on its devices and it manages to sell voice and data at ridiculously low rates, which is what set off the France’s price war in the first place. Of course, Free uses a few technical tricks to keep its prices low, the biggest being the 4 million home and business Wi-Fi access points it uses to offload data traffic.

But shunting traffic off of expensive cellular networks doesn’t explain the price differences entirely. You only have to look to the U.S. prepaid and mobile virtual network operator (MVNO) sectors to see that. Prepaid operators like Leap Wireless’s Cricket and MetroPCS offer voice and data plan equivalents to AT&T and Verizon’s at very steep discounts. They require customers to pay all or most of the costs of their handsets up front. In exchange, they not only charge cheaper rates but don’t tie customers down to contracts.

SIM cards galoreThe price gap is even more visible when you start looking at the new batch of MVNOs emerging in the U.S. Operators like TracFone’s Straight Talk, H2O Wireless and Red Pocket just sell SIM cards, but they offer unlimited voice and SMS plans as well as data buckets that undercut major carriers’ prices by half or more. These operators have no ingrained technology advantage. They’re buying their minutes and bytes from AT&T and T-Mobile at wholesale rates, but they’re charging significantly less when it comes to retailing the final product.

In Europe, procuring your device and your service plan separately is common, but it’s still very much a foreign concept in the U.S. where consumers have become accustomed to the idea that smartphones are cheap disposable electronic goods. Carriers have been more than willing to reinforce that misconception so long as customers are willing to pay high monthly rates and sign long-term contracts.

There are signs of change, though. T-Mobile – which already offers some of the cheapest rates for a major carrier – is aggressively pushing its value plans, which offer significant discounts on voice and data plans if subscribers pay for their phones up front or bring their own devices to the party. It’s going to take more than just T-Mobile to change consumer mindset. Other carriers have signaled they’re open to the idea of unsubsidized plans, but the impetus for change may come from consumers, not carriers.

There’s a growing discontent with the high price of mobile service, and a sizable number of prepaid operators and MVNOs have arisen to feed that discontent. Eventually the realization will follow that the high prices we’re paying aren’t necessarily for data, rather we’re paying back the mortgage on our phones.

Featured photo courtesy of Shutterstock user Stuart Miles; SIM cards image courtesy of Flickr user mroach

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